Author Topic: Losing $2 Monthly - Converted Multifamily  (Read 4372 times)

Handlebar Harry

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Losing $2 Monthly - Converted Multifamily
« on: September 10, 2014, 09:08:36 AM »
Hey guys, I've made some major financial changes this past year. I credit MMM and this blog for most of it! I've gone from a -$54k net worth to a +$12k since March! Anyways, I have a specific question about a recent real estate project I've embarked on. I need some advice from some senior real estate Mustachians.

I recently bought a 3bd/2bath house and converted the basement into an apartment (in MMM fashion by doing the work myself :)). I adding another bedroom and bath, which now I live in. I have renters above me paying $1550 a month, which includes all utilities. With all my expenses (mortgage, taxes, insurance, utilities) totaling roughly $1552 a month (-$20), was this still a good move? In essence I'm paying $20 a month to cover my housing costs. If I decide to move out and rent both apartments, I'd be cash flow positive $750 which is one of the factors I used to base my purchasing decision on.

By doing all of this, I'm making huge strides towards ER, but I wanted to see if anyone sees any holes in my plan? How obtainable is it have a duplex or two family that will make you money if you live in one of the apartments?

Thanks for your help!

- HH

ketchup

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #1 on: September 10, 2014, 09:12:38 AM »
This is very much a solid plan.  It's a great way to kickstart your savings and investments.

http://www.biggerpockets.com/renewsblog/2013/11/02/hack-housing-get-paid-live-free/

Another Reader

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #2 on: September 10, 2014, 11:09:55 AM »
Did you take out permits and do this legally?  If not, you may have a tough time selling the property, your insurance may not cover you for losses, and the City could nail you for an illegal conversion, hit you with a big fine, and force you to convert the space back.

Proud Foot

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #3 on: September 10, 2014, 01:39:10 PM »
I understand wanting to maximize your revenues on the house. If you moved out you say you will be cash flow positive of $750, I assume this is only the cash from renting out the house. What would it cost for another place for you to live? I would include that in your decision of whether to move out.

windypig

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #4 on: September 10, 2014, 01:43:00 PM »
I see you are in Boston, what part of the city is your rental in?

sammybiker

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #5 on: September 10, 2014, 01:49:06 PM »
HH,

Congrats on the work.  It sounds like you may have built a good bit of equity into this property.  As a poster above mentioned, double check on permits to make sure you're OK when you exit.

As for cash flow, this looks like a poor cash flow deal once you move out as most of that $750 additional rental will be used towards annual repairs/maintenance & vacancy.  Management too unless you're going after that yourself.

My view:

A)  You have saved monies in terms of your own personal residence and you can apply saved monies towards acquiring true cash flow deals if that is your pursuit.

B)  You probably have a some decent equity gains from splitting this property up that you may be able to capitalize on.

C)  You don't have cash flow.  Look for value in one of the above.

jnc

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #6 on: September 10, 2014, 03:11:43 PM »
I think they meant $750 cash flow per month.
I don't think that will be eaten up entirely by vacancy and maintenance.

Gone Fishing

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #7 on: September 10, 2014, 03:22:31 PM »
I'd say you did pretty well!  Between the appreciation, mortgage principal, and free rent, this move should be a nice boost to your 'stache over time!

sammybiker

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #8 on: September 10, 2014, 05:16:50 PM »
I understand that they stated $750 on a monthly basis.

Vacancy varies but best case you should budget for a couple weeks per unit per year.  Assuming $2300 in gross rents monthly rents, this equals $1150 annual/$95 monthly.  Maintenance/repairs @ 10% of gross rents or $2760 annual/$230 monthly.  Management @ 10% of gross rents or  $2760 annual/$230 monthly.  So totaling $550 less your $750 "cash flow"  and you're looking at about $200 real cash flow monthly.

Divide this by the amount of actual cash (down payments, closing costs, repairs/renovations) he has in the deal and you'll see your annual ROI.  I'm willing to bet it's not great.

The value with this situation will be equity/forced appreciation and personal savings due to lowered living cost, not cash flow.

I think they meant $750 cash flow per month.
I don't think that will be eaten up entirely by vacancy and maintenance.

Zoot Allures

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #9 on: September 10, 2014, 05:54:04 PM »
If you're living for free, that's a great cash-flow situation as I see it. The money you're saving on housing can now flow into your other investments, whatever they happen to be.

I'm doing something similar: buying a house with the intention of creating a basement apartment, living in it, and renting out the upstairs. The upstairs rent will cover my mortgage and my "rent" will be servicing the debt from the remodel. (I'm going the legally permitted duplex route.) It'll be a great day when that debt is paid off!

Handlebar Harry

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #10 on: September 11, 2014, 06:26:12 AM »
@Another Reader - The conversion was done legally with permits/zoning.

@sammybiker - Thanks for the analysis. You put the situation in better view. It's making me reconsider my future plans for the house. For right now, it looks like a good situation, but if I decide to move out maybe I'll look to sell and invest the capital in a better property.

As far as management goes, I plan to manage the property myself. This will free up the $230 monthly which will bring the net cash flow closer to $430 a month. I was always under the impression that $200 per unit in cash flow was healthy. Is $430 still bad?

Also for consideration - I bought the house with only 3% down and only put $7,000 into the house for the conversion.

sammybiker

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Re: Losing $2 Monthly - Converted Multifamily
« Reply #11 on: September 11, 2014, 07:49:20 AM »
Okay, that sounds great...figured the conversion put you well into five digits.  Managing yourself, this looks like a good cash on cash return.

Yeah, I hear $100/door...$200/door...etc.  I like to focus more on how much cash flow I'm making vs how much cash I had to put into the deal.  $200/door doesn't mean squat IMO if you had to put down 25% on a 300k property + monies for renovation.

However, $200/door is great if you're only cash committed 25-45k (no idea what 3bd/2ba go for in Boston).

This deal just got a whole bunch better.  Great job!


As far as management goes, I plan to manage the property myself. This will free up the $230 monthly which will bring the net cash flow closer to $430 a month. I was always under the impression that $200 per unit in cash flow was healthy. Is $430 still bad?

Also for consideration - I bought the house with only 3% down and only put $7,000 into the house for the conversion.
« Last Edit: September 11, 2014, 07:50:58 AM by sammybiker »